For the capital gains tax on collectibles to be calculated correctly, code C must be entered in column F, part II, of Form 8949. This should activate an entry in line 18 of Annex D and require the use of the tax worksheet in Annex D. Collectibles held for more than one year are subject to long-term capital gains taxes with a limit of 28%. Collectibles held for less than one year are taxed in the same way as ordinary income. Taxes are a mixed bag for collectors, especially those who have invested in gold in their IRA.
Gold in my IRA is subject to the same capital gains taxes as other collectibles. Generally, you must declare all sources of income on your federal income tax return, including income from hobbies, investments, and business activities. Long-term capital gains from investing in collectible items are generally subject to a maximum federal tax rate of 28%, as opposed to the standard 15% tax rate on long-term capital gains (or the federal rate of 20% for people with high incomes). In addition, taxpayers may owe the 3.8% net investment income tax. If you buy and sell gold or silver, or exchange-traded funds in gold and silver, they will be taxed as collectibles (since gold and silver are considered collectibles).
The challenge for drafters of legislation in applying the highest tax rate to collectibles was to define the term object of collection. The Tax Court has ruled in favor of taxpayers in cases where facts and circumstances support a profit motive, despite the fact that raising money is often a fun activity. Therefore, the tax law allows any net loss of capital or loss of long-term capital to be transferred to any other category to first offset net gains in the 28% category. If you use a collector's item for personal use (hanging a picture on the wall of your house instead of storing it), you won't be able to claim a loss of capital.
For example, a taxpayer might consider selling a portion of their gold coins in one year (for example, near the end of the year) and selling the rest the following year (near the beginning of the following year) or selling a block of shares from a precious metals ETF one year and selling other stocks the following year. In addition to providing a return on investment, collectibles can serve as a source of diversification for those who invest heavily in securities, such as stocks and bonds. On the contrary, a taxpayer is not considered an investor when he acquires the collectible primarily for personal use and enjoyment regardless of whether the asset will increase in value. In addition to considering the non-tax costs and benefits of selling the collector, the tax advisor may also want to consider some of the following alternative basic planning strategies, rather than selling the asset in a taxable transaction.
In general, it is only possible to achieve the same FMV donation deduction result with collectible items of tangible personal property if the charity is expected to use the collector item in its charitable function.
